So you want to understand ITEP ...

BREAKING

Analysis of proposed Ascension Parish exemptions has jaw-dropping numbers

Download the analysis here

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The August 2017 study of ITEP by Together Baton Rouge is the best place to start to understand the program in general and what's at stake right now with the shift to local control.

The study's introduction is included below.

You can download the whole study here: "Giving Away the Farm" (August 2017).

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Why this matters now  

Since 1936, Louisiana has been the only state in the nation to endow a state-level board with the authority to approve corporate exemptions from local property taxes, without the approval, or even knowledge, of the local entities paying the cost of those exemptions. It’s called the industrial tax exemption program, or ITEP, and it is the largest program of state subsidies to corporations in the nation.

In the current fiscal year, local governments in sixty of Louisiana’s sixty-four parishes are losing $1.9 billion in revenue due to ITEP exemptions. The exemptions affect the budgets of cities, parishes, sheriffs departments, fire districts, libraries, parks — any entity that receives revenue from a local property tax millage. The entities hardest hit by ITEP are Louisiana’s public schools. In 2017, Louisiana’s school districts are losing $720 million in revenue due to ITEP, fully 20% of total state and local funding for public schools.

Due to an Executive Order signed by Gov. John Bel Edwards in June 2016, local school districts, sheriff departments, parishes and cities, for the first time in 80 years, will have the authority to determine for themselves whether to approve industrial tax exemptions and on what terms. The first ITEP applications subject to the Executive Order are going before local bodies over the next several months.

[Download a pdf of the entire study here.] 

A well-funded lobbying campaign is underway across the state to attempt to convince local school districts and other public bodies to grant automatic approval to industrial tax exemptions, without any analysis of whether the projects requesting subsidies require a subsidy or bring a public benefit. The campaign already has convinced one parish, West Feliciana, to grant prior approval to all future exemption applications, site unseen.

Louisiana Economic Development (LED), the state agency which administers ITEP and which local entities are looking to for information, has declined even to give an assessment of how much the exemptions are costing those entities at the local level.

There is a need for independent analysis of how industrial tax exemptions have performed at the local level, to help local governments, officials and citizens apply the scrutiny that has been lacking at the state level in the past.

This report seeks to help fill the need for independent analysis to help public officials develop procedures for vetting exemptions going forward that fulfill their constitutional obligation to use public resources only for public purposes.

 

Introduction: incentives vs. gifts

There is a difference between an incentive and a gift.

An incentive motivates or encourages someone to do something they otherwise would not have done. A gift is given freely with no expectation of anything in return.

The Louisiana constitution authorizes incentives for economic development. It does not authorize gifts.

Into which category do Louisiana’s industrial tax exemptions fall?

To what extent have the exemptions encouraged manufacturers to make investments they otherwise would not have made, rather than merely subsidizing routine investments companies would have made anyway?

What are ITEP’s outcomes for business attraction, business expansion and job creation? What are its costs in foregone revenue to local taxing bodies?

Do the program’s outcomes justify its costs?

These are straightforward questions — the kinds of questions that are asked and answered routinely for any government program operating within the normal bounds of public accountability.

One of the most unusual things about the industrial tax exemption program is the extent to which it has not operated within those normal bounds.

ITEP is Louisiana’s most expensive economic development program, by a wide margin. In 2017 alone, the program cost $1.9 billion in foregone tax revenue to local taxing bodies, five times the cost of the combined total of the state’s other major corporate development incentive programs. On a per capita basis, ITEP is the single largest program of state subsidies to corporations in the nation — roughly twice as large as the second place program.

Yet throughout the entirety of ITEP’s 80-year history, Louisiana Economic Development, the state agency that administers ITEP, has never:

  • conducted a cost-benefit analysis of the program,
  • calculated how much the exemptions are costing local taxing bodies in lost revenue each year,
  • evaluated ITEP’s track record for business attract, business expansion or job creation,
  • assessed the extent to which the investments ITEP subsidizes would have been made anyway without the subsidies.

The purpose of this report is to answer those questions, looking specifically at East Baton Rouge Parish from 1998 to 2017.

ITEP at a crossroads

On June 24th, 2016 Governor John Bel Edwards signed an Executive Order which has the potential to bring about the most significant reforms to ITEP in the program’s history. The order, coupled with a supplementary one issued a few months later, makes four basic changes to the ITEP program:

1) It makes job creation a requirement for receiving an exemption,

2) It renders “miscellaneous capital additions” ineligible for exemptions and prohibited,

3) It establishes a cap on exemptions’ second terms at 3 years and 80% of the property taxes that would be owed (instead of 5 years and 100%),

4) It devolves decision-making authority over whether exemptions are approved and on what terms to the local taxing bodies that bear the exemptions’ costs, specifically school districts, parish governing authorities, sheriffs and municipal governments (if the applicant company is within a city).

We’ve described these reforms as “potential” rather than established for two reasons. First, the executive order grandfathered in a large number of exemptions under the old rules. Exemptions in their first ITEP term and those for which an “advance notice” was submitted prior to June 24th, 2016 are not subject to the executive order. The new batch of exemptions — the ones subject to the local approval requirement established by the Governor’s executive order — are only now beginning to be considered.

There’s a second, potentially more significant reason the jury is still out on whether change has come to ITEP — the question of what local officials will do with their new authority. Empowering local officials to make decisions about their own taxes, rather than allowing a distant, state-level board to make their decisions for them, might lead to different outcomes. Or it might not. It depends on whether those local officials approach their responsibility at all differently from decades of Commerce and Industry Board appointees who have approved ITEP applications at a rate 99.95% over the last twenty years.

Will local officials continue this grim tradition of rubber-stamping costly exemptions, without serious evaluation of whether the exemptions bring about a public benefit worth those costs? Or will our officials act with local interests more firmly in mind, which means establishing clear standards for evaluating ITEP applications that separate the “incentives” from the “gifts”?

That, in a word, is the presiding imperative facing local officials and citizens seeking to put in place responsible policies for ITEP in the future — to create a vetting process for exemptions that distinguishes the incentives from the gifts.

We’ve written this report to help with that process.

[Download a pdf of the entire study here.]

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